2019.5 Extract from ADB Good Practice Report
Good Practices For Developing a Local Currency Bond Market
Lessons from the ASEAN+3  Asian Bond Markets Initiative

 MAY 2019


A.    The Most Suitable Professional Market (or Market Segment)

1.                   In ASEAN+3 Bond Market Forum (ABMF) discussions on a common denominator as the basis for an ASEAN+3 Multi-Currency Bond Issuance Framework (AMBIF) Market, Sub-Forum 1 (SF1) members eventually realized that the drivers effectively defining a market as a professional market differed significantly across the region’s jurisdictions. While the emphasis was on professional investors in some markets, specific legislation existed for private placement or other exempt regimes in other markets.

2.                   In fact, several jurisdictions featured more than one market or market segment with different drivers for the qualification of professional. While market practice in an individual economy is the ultimate driver of what type of professional market or approach should be applied and which one would be most utilized, no single such regime or approach was sufficiently suitable to serve as the defining link to connect ASEAN+3 member economies in the spirit of the proposed common bond issuance framework.

3.                   ABMF SF1 concluded that it might be more practical to identify what was termed the most suitable professional market (or market segment) in each economy. This would require breaking down the respective characteristics that made a market (or market segment) professional and defining which of these individual features and functions were intended to be included in an AMBIF proposal, such as eligible market participants, and required limitations or restrictions.

4.                   A key lesson learned from the ABMF Phase 2 market visits and discussions was that market drivers differed across bond markets in ASEAN+3 member economies. For example, private placement concepts differed quite substantially by market. Therefore, SF1 has focused on the similarities among existing market features. At the same time, SF1 has not sought to unify market features and terminology across economies.

B. AMBIF Investors as the Essential Basis for the AMBIF Components

5.                   Through discussions involving the Asian Development Bank (ADB) Secretariat and ABMF SF1 members and experts, AMBIF Investors became the basis for the AMBIF Elements as defined in Chapter IV of the ABMF Phase 2 Report (section E below, including Table A10.1: AMBIF Elements and Brief Description). AMBIF Investors are a critical component of AMBIF as proposed by ABMF. The following investor types are proposed as AMBIF Investors: banks, broker–dealers and securities houses, government entities, insurance companies, investment advisory businesses, provident funds, and pension funds. Foreign investors are to be included to the extent they are eligible to participate under the above investor types.

C. ASEAN+3 Multi-Currency Bond Issuance Framework Market

6.                   Based on SF1 research, ABMF members decided to nominate professional markets in the region as being populated by professional investors, including private placement markets or regimes positively recognized by regulators that allowed limited disclosure to professional investors and waived the full disclosure requirements typically applicable to ordinary public offerings across jurisdictions. However, in the interest of allowing the largest possible number of ASEAN+3 economies to participate in AMBIF, the definition of an AMBIF Market was not based on a single professional market concept, but instead represents the most suitable professional market or market segment in each economy. The resulting AMBIF Markets carry strong selling restriction mechanisms to support the regulatory mandate to protect nonprofessional investors. The intention was to create an intraregional professional bond market populated only by professional investors, issuers, and intermediaries in the belief that regulatory bodies’ concerns over investor protection could be better mitigated in professional markets than in retail markets.

D. The Way to Connecting the Markets

7.                   Nevertheless, ABMF SF1 came to the conclusion that the key to AMBIF’s future success lay in connecting the region’s economies using markets or market segments similar enough so as to not pose a challenge to defining the characteristics of AMBIF as a common platform. The principle behind this conclusion is illustrated in Figures A10.1, A10.2, and A10.3. Each figure represents a step in the process toward the realization of a common AMBIF Market.

8.                   In the initial step illustrated in Figure A10.1, it was important to identify the professional markets or market segments that already existed in individual ASEAN+3 economies.

9.                   Figure A10.2 illustrates the second step of the process, in which ABMF SF1 members set out to study and identify possible professional market elements that could enable connections to be made between the region’s markets.

10.                   Figure A10.3 illustrates how a professional bond issuance framework could be created by combining the identified professional markets using the suitable professional market elements.

11.                   The intention is to create an intraregional professional bond market populated by regional professional investors, issuers, and intermediaries. Appropriate handling of the selling and transfer restrictions for ring-fencing of said market is mandatory for the protection of nonprofessional investors.

E. Elements of the ASEAN+3 Multi-Currency Bond Issuance Framework

12.                   As the AMBIF Market grows, it will be necessary to ensure the restriction of selling or transferring debt instruments to nonprofessional (retail) investors at all times. Such selling and transfer restrictions need not only be observed in the home market of an intermediary or market participant, which is represented as Jurisdiction A in Figure A10.4, but also in the host jurisdictions (Jurisdiction B). Similarly, for every individual market issuance, the selling and transfer restrictions shall be reflected specifically in the information memorandum, offering circular, or program information; the underwriting or subscription agreement; and other necessary issuing document categories.